Tax Planning with Corporate Structures and the New Tax Laws
As we look at tax Reform and the numerous challenges it presents to even the smart tax planner, one of the most asked question by business owners is “What type of entity should I be?”.
With the addition of the new 20% deduction available to most businesses, many tax preparers simply look at benefits of ‘S’ versus ‘C’ as more of a math problem to solve. What is the tax impacts of that second layer of taxation (even though the rate is much lower) versus the pass-though higher rates and new 20% reduction? However, your tax adviser needs to look at all the facets of a business, including (and probably most importantly) cash flow. For entities where a main part of cash flow useage is debt payments instead of distributions, that math problem type view of tax reform may not be the best solution at all. Take for example a company that has corporate profit of $1 Million and intends to use the bulk of that money to pay down debt. In the ‘S’ corporate structure with a sole shareholder, the overall effective income tax would be approximately $326,000 and leave the company with about $674,000 to pay down debt. If that same company were a ‘C’ corporation, the overall taxes would be about $289,000 and leave the company nearly $711,000 to pay down debt. That’s an additional $37,000 more paid down on debt in one year simply with tax planning.
We all know that things are not always so simple, and looking at ALL the fact (past, present and FUTURE) are needed to properly plan for changes if we want to be as tax beneficial as possible. That is what we do. We listen, we think forward, and we use our expertise to make smart planning moves. Let our team at RPB help.
Brad Voght is the tax partner at Reilly, Penner & Benton, LLP, a public accounting firm and trusted adviser specializing in business and personal tax matters as well as in not-for-profit work, school organizations as well as government and municipal agency work. The firm also provides ERISA audit services to publicly held entities throughout the country. A PCAOB registered firm, Reilly, Penner & Benton CPAs also known as RPB CPAs, has served closely held businesses and has provided tax preparation and advice, financial statement audits, reviews and compilations, employee benefit plan audits, bookkeeping services, business valuations, fraud prevention and consulting services since 1907.